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Mastercard Incorporated (NYSE:MA)

Q4 2011 Earnings Call

February 02, 2012 9:00 am ET

Executives

Barbara Gasper -

Ajay Banga - Chief Executive Officer, President, Director, Member of Executive Committee, Chief Executive Officer of MasterCard International and President of Mastercard International

Martina Hund-Mejean - Chief Financial Officer and Member of Executive Committee

Analysts

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division

Glenn Fodor - Morgan Stanley, Research Division

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

Christopher Brendler - Stifel, Nicolaus & Co., Inc., Research Division

David Togut - Evercore Partners Inc., Research Division

Craig J. Maurer - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

David S. Hochstim - Buckingham Research Group, Inc.

Darrin D. Peller - Barclays Capital, Research Division

Bill Carcache - Nomura Securities Co. Ltd., Research Division

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Jason Kupferberg - Jefferies & Company, Inc., Research Division

Robert P. Napoli - William Blair & Company L.L.C., Research Division

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

Bryan Keane - Deutsche Bank AG, Research Division

Greg Smith - Sterne Agee & Leach Inc., Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 2011 MasterCard Financial Results. My name is Cesenia, and I'll be your operator for today. [Operator Instructions] And now I would like to turn the conference over to Barbara Gasper. Please proceed.

Barbara Gasper

Thank you, Cesenia. Good morning, everyone, and thank you all for joining us today, either by phone or webcast, for our discussion about our fourth quarter and full year 2011 results. We also appreciate your patience with the technical difficulties this morning, and I'd like to say that we are going to extend the call beyond our normal length just to accommodate everybody for your patience.

With me on the call today are Ajay Banga, our President and Chief Executive Officer; and Martina Hund-Mejean, our Chief Financial Officer. Following comments from Ajay and Martina, we will open up the call for your questions.

This morning's earnings release and the slide deck that will be referenced on this call can be found in the Investor Relations section of our website, mastercard.com. The earnings release and the slide deck have also been attached to an 8-K that we filed with the SEC earlier today. A dial-in replay of this call will be available for one week, through February 9.

Finally, as set forth in more detail in today's earnings release, I need to remind everyone that today's call may include some forward-looking statements about MasterCard's future performance. Actual performance could differ materially from what is suggested by our comments today. Information about the factors that could affect future performance are summarized at the end of our press release, as well as contained in our recent SEC filings.

With that, I will now turn the call over to our CEO, Ajay Banga. Ajay?

Ajay Banga

Thank you, Barbara. Good morning, everybody. Before Martina gets into the details of our results, let me start, as usual, with some high-level comments. In the fourth quarter, we saw net revenue growth of 20% as reported or 21% on a constant-currency basis. And that helped to fuel operating income growth of 34%, excluding the special item for the litigation charge.

And as you see on Slide 2, this quarter's performance capped off a very strong 2011 for us, with net revenue and EPS growth ahead of our 3-year objectives. We had a strong operational performance with annual gross dollar volume, cross-border volume and processed-transaction growth rate in the mid- to high teens, all driven by very solid local execution. And we delivered an operating margin a bit ahead of our 50% minimum target, while actually finding a way to continue to invest in strategic initiatives for the long-term growth of our business.

We have some decent economic news in the United States lately with the unemployment rate dropping to 8.5%, consumer confidence increasing over the past few months to an 8-month high. This comes as consumer balance sheets have improved, following a period of deleveraging. And all of this has had a positive impact on consumer spending, as is reflected in our SpendingPulse data, which showed growth in December for all the 11 retail sectors that we track. Now we saw continued strength in our own U.S. volumes, which were up about 12% for the fourth quarter. But this positive news remains tempered by the uncertainty that persists in the picture of the unemployment rate and housing prices. And you should also remember that U.S. retail sales, as well as our own U.S. volumes, begin to hit tougher year-over-year comparisons -- actually, that started late in 2011, and it'll persist through the year 2012.

In Europe, our business remains strong in spite of another quarter of negative headlines regarding the macro situation there. Fourth quarter volumes grew almost 17%, in line with the growth we saw with the prior 2 quarters, driven by double-digit cross-border volume growth. The addition of domestic processing in The Netherlands continues to drive significant processed-transaction growth in the region.

You should remember that our European region is comprised of nearly 60 markets, extending far beyond Western Europe and the Eurozone. In fact, the majority of our revenue comes from the relatively stronger economies of Northern and Eastern Europe, where we continue to see strong growth in both processed volume as well as revenue, with particular strength in France and Germany and The Netherlands.

The countries most often talked about as troubled, Portugal, Italy, Ireland, Greece, Spain account for less than 5% of our 2011 global net revenue. In January, processed volume growth in these countries, these so-called troubled countries has decelerated only slightly from the mid-teens level that we saw over the previous several months. That said, in the Eurozone, we have seen a decline in consumer sentiment in the third and fourth quarters of 2011.

In the past, it has taken a few quarters before changing consumer sentiment impacts the growth of PCE in this region. And as such, we've continued to watch our European business closely. And of course, there is the potential that Europe's impact could spread to the U.S. and other regions. That's what we read about in the papers every day, but the facts are that as it relates to Latin America and the Asia-Pacific, Middle East, Africa we finished 2011 with GDV growth greater than 20% in the fourth quarter in those 2 regions as well, with strength in both domestic and cross-border volumes.

With all of that as a backdrop, the facts are the lingering uncertainty in Europe and the lukewarm recovery in the U.S. is what makes us continue to have a cautious outlook for overall consumption growth of PCE. We remain focused in what we can influence: the steady displacement of cash and our ability to gain share in the electronic payment space, both of which, we've continued to make progress on.

So before I get to some business highlights, I thought I'd give you a quick update on the litigation front. And as you see in this morning's earnings release, we took a $495 million after-tax charge in the fourth quarter. This charge is an estimate of our financial liability that could result from a settlement of U.S. merchant litigations and is basically based on the progress in the mediation process. We know there's been a good deal of speculation in the marketplace about the terms of this settlement -- of this potential settlement. The mediation discussions remain confidential, so I can't really say much beyond what's in our release. But being that much of the speculation is about credit interchange, I want to make clear that we would not agree to any significant or long-term reductions in MasterCard's credit interchange rates as part of any settlement.

In the meanwhile, we continue to execute our strategy displacing cash, winning deals to get more than our fare share of payments growth. And let me share a few business highlights. During this quarter, we signed a number of really interesting partnerships connected to our strategic priorities: First, our global agreement with Western Union to help us grow and diversify while displacing cash and serving some of the world's 2.5 billion financially underserved people. In addition to becoming Western Union's preferred prepaid brand globally, we are working to enable all 485,000 agent locations of Western Union to serve as reload locations for any MasterCard Prepaid Card. Western Union and MasterCard are also working together using our MoneySend platform and issuer relationships to help remove cash from either side of the remittance transaction.

Last year, we entered into a JV with Telefónica, covering the 12 Spanish-speaking markets in Latin America where Telefónica operates the Mobistar brand, with 87 million customers. In November, we signed an additional JV agreement with Telefónica, this one in Brazil. The Telefónica's brand is called is called Vivo, and it reaches an additional 65 million customers. With that, we now have completed our relationship across the breadth of Telefonica's geographic footprint in Latin America. Both these JVs are focused on providing consumers with mobile payment services, to drive financial inclusion, increase acceptance of the users of payments over the next few years.

We also entered into a strategic relationship with Intel to leverage Intel's ultra-book chip, what some of you may have seen at this year's Consumer Electronics Show. When a consumer reaches checkout on an e-commerce site, all they will need to do is tap their PayPass-enabled device from their computer, which will do a few things. For consumers, it'll speed up and simplify the checkout process while making the transaction more secure, because it leverages dynamic authentication, something most PayPass transactions do. And for merchants, while this security will help to reduce fraud, we believe this will also help to reduce shopping cart abandonment, making it much more productive for them.

We've also signed a commercial agreement with mFoundry, as well as having taken a small equity stake in that company. mFoundry develops mobile banking apps for nearly 600 banks and credit unions in the U.S. This should give us a chance to give the U.S. consumers of these institutions -- of these 600 institutions, mobile PayPass capabilities integrated with their online banking apps.

On to the U.S. in specific, the team continues with solid execution across the lines of business in debit. Banks are continuing to work through their decisions to comply with debit non-exclusivity. At this point I can tell you, we have won PIN deal with a couple of major U.S. banks and have already begun to see some of those transactions.

We've signed an agreement with KeyBanc as well to add PIN debit and to move on to our IPS platform. We've also renewed our signature debit and ATM relationships with them. During the quarter, we converted the conversion of Huntington to MasterCard debit card and onto our IPS platform. And interestingly, while the top 25 banks in the U.S. do get spoken of most often, we all know that independent banks and credit unions are important players. Credit unions alone serve over 90 million U.S. consumers. In 2011, we made substantial in-roads here. We've signed debit and credit deals with almost 150 of these issuers. And importantly, a good proportion of these deals were conversions from competition.

We've also won some new U.S. public sector prepaid programs, which should be launching shortly. The State of California will issue prepaid MasterCard for child support payments. New York State, Oklahoma will leverage prepaid MasterCards as an option to distribute income tax refunds. Dollar General now accepts MasterCard credit cards and will distribute MasterCard Prepaid Cards in its 10,000 stores, all of which will also become prepaid reload locations like those Western Union agents I was telling you about. And just this week, we contracted with Toys"R"Us to be the exclusive network partner for their co-brand program.

So on the topic of merchants, we're bringing all of our assets to bear to drive value for merchants in a variety of ways. Let me give you some flavor. Two major automotive brands will begin accepting MasterCard debit cards in the U.S. for monthly lease payments. In France, Casino, a top 5 mass retailer will convert its private label store card to a co-branded MasterCard PayPass card. PayPass acceptance new across geographies, some examples: taxis in Hong Kong; pharmacies and gas stations in Russia; discount grocers in Austria; Canada's largest pharmacy; in the U.S., RadioShack, Gap stores in San Francisco, Pinkberry and so on.

With our Priceless Cities program now in New York, in London and Toronto, we partnered with restaurants, retailers, theaters and other merchants to drive traffic and offer cardholders priceless experiences they would otherwise not be able to get. In Europe, we are partnering with affluent merchants to bring global travel benefit, VIP guest passes, accelerated bonus points to MasterCard World Elite and Black cardholders. The luxury brands we are working with include, for example, Mandarin Oriental, Fairmont hotels, Oxford Jet and more are getting signed up.

In the other regions, we are continuing to work on paving the way for the growth of electronic payments. In Africa, a growth region that MasterCard has traditionally been relatively underrepresented in, we have signed a bunch of things. During the quarter, we signed an MOU with Ecobank Group to drive the issuance and acceptance of prepaid and debit accounts across 31 African markets, where Ecobank has more than 750 branches and offices.

In Nigeria, we signed an agreement with Zenith Bank, one of the largest banks in Western Africa, as well as a debit deal with Skye Bank. We've continued to launch debit cards with other customers as well, programs with GTB Bank in Ghana, NBC in Tanzania, as well as a major global bank with a presence in Kenya to issue world debit cards. Also in Kenya, we've launched prepaid MasterCards aimed at young travelers with Equatorial Commercial Bank.

In South Africa, we've launched PayPass cards in virtual card numbers, as well as prepaid cards for insurance, and interestingly, micro-finance distribution. Now we've even got an office in Nairobi to serve as a hub for our East African business. In Russia, we're working with MTS, the largest mobile network operator in that market, and we're developing mobile PayPass products for their consumers. They're pushing ahead of mobile payments in China. We just signed an MOU with Unicom for e-pay to explore collaboration. And while on China, China Industrial Bank launched a Geneo [ph] airlines co-brand MasterCard, which adds the co-brand relationships we already have with the top 4 airlines in China.

In the commercial space, we've launched numerous programs in China, including 5 new co-branded commercial card products with China Construction Bank, which by the way is also launching a frequent business airline travel card. And talking of airline cards, Air New Zealand Airpoints customers will now get a card that comprises a monthly currency PayPass-enabled MasterCard Prepaid Card on one side, with their Airpoints membership card on the other side. And you can actually tap the card to check into your flight. So that's just the flavor. Tons of these going on.

Now let me turn the call over to Martina for a detailed update on our financial results and operational metrics. Martina.

Martina Hund-Mejean

Thanks, Ajay, and good morning, everyone. Let me begin on Page 3 of the deck, where we'll focus on the 2011 non-GAAP column, which excludes the special item related to litigation. And I'll compare those numbers to the 2010 actuals.

This quarter's EPS growth of 27.5% was driven by a combination of strong revenue growth and solid expense management. Net revenue grew 20.2%, while operating expenses grew 11.5%, resulting in an operating margin of 44%, a 4.4 percentage point increase year-over-year. Foreign exchange had minimal impact on these numbers.

Overall, acquisitions added 2 percentage points of growth to net revenue and 3 percentage points to operating expense growth. This is a lesser impact than we have seen in recent quarters, as we anniversary-ed the acquisition of DataCash in late October. The effective tax rate was 32.3%, versus 28.7% in the fourth quarter of 2010, mainly driven by benefits we recorded last year in connection with the repatriation of foreign earnings.

Let's turn to Page 4. And here you can see the regional breakdown of our gross dollar volume for the fourth quarter. Worldwide GDV was $863 billion, up 16.3% on a local-currency basis or 14.9% on a U.S. dollar converted basis. U.S. GDV increased 12.1%. And rest-of-the-world GDV increased 18.4%.

On a local-currency basis, worldwide credit GDV was 13.6%, driven mainly by APMEA and Latin America. Worldwide debit GDV grew 21.2%. In the U.S., local GDV grew 18.4% aided by the Sovereign and Huntington wins. Debit growth for the rest of the world was 23.4%, driven by APMEA and Europe.

Fourth quarter volumes grew 17.5% on a local-currency basis. The slight deceleration versus the 19% cross-border growth that we saw in the third quarter was the result of lower cross-border growth for U.S.-issued cards and in Europe, while the growth in both regions remained in the double digits in the fourth quarter. In the U.S., there's not a fundamental change in the usage of U.S. cards overseas, but rather, this was largely the result of a stronger U.S. dollar on purchases. In Europe, the decrease was very modest.

Turning now to Slide 5. We proposed 7.7 billion -- I'm sorry, we processed 7.7 billion transactions in the fourth quarter, up 23.2% over last year's fourth quarter. Double-digit increases in all regions were aided by domestic processing opportunities in The Netherlands and Brazil; new deals such as Huntington and Sovereign; as well as from U.S. debit routing changes. Globally, the number of MasterCard and Maestro cards grew 11.3% to over 1.8 billion.

So now let's turn to Page 6 to discuss net revenue in a bit more detail. Domestic assessments grew 18.7%, and cross-border volume fees grew 14.5%. Both of these line items were driven mainly by higher volume. The 12.6% increase in transaction processing fees was driven by a greater number of processed transactions, including PIN debit transactions, which drive incremental revenue albeit at a lower year.

Other revenue grew 27.5%, mainly driven by our Access Prepaid acquisition, which closed at April 2011, and growth in consulting services. Rebates and incentives grew just under 9% for the quarter, driven by both new and renewed deals and healthy volume growth. U.S. [ph] revenue grew 15% in 2011 and represents now 39.6% of our total net revenue.

Let's move to Page 7 for some detail on expenses. Total operating expenses increased 11.5%, excluding the special item. Acquisitions, largely Access Prepaid, added about 3 percentage points to operating expense growth. G&A increased 14.3%, primarily driven by higher personnel expenses related to strategic growth initiatives within core products, emerging payments, information services. And Access Prepaid contributed about 4 percentage point to this growth rate.

The 4.8% increase in A&M was mainly driven by investments in Priceless Cities, customer-specific activities and sponsorships. Depreciation and amortization increased 24.3% primarily due to the amortization of intangible assets from our acquisition.

The cash flow statement and balance sheet highlights are summarized on Page 8. We generated $784 million in cash from operations in the fourth quarter and ended the quarter with cash, cash equivalents and other liquid investments of $4.9 billion. The slide also summarizes our progress on our share repurchase program to both year-end 2011 and through last Friday.

Now let's turn to Slide 9. And let's discuss 2012, starting with an update of what we have seen for MasterCard processed volumes for the first quarter through January 28. Our first quarter volume grew about 17% globally, in line with the fourth quarter. This was driven by continued double-digit growth in all regions.

In Europe, cross-border growth remains in the mid-teens, with intra-regional growth continuing to outpace interregional growth as the European stay closer to home. In the U.S., cross-border growth remains about 11%, in line with the fourth quarter. Although not a perfect proxy for GDV, total U.S. processed volume grew about 13%, the same level that we saw in the fourth quarter, driven by continued strength in debit and commercial credit volume.

In January, total processed volume growth for the rest of the world was about 17%, in line with what we saw in the fourth quarter. European processed volume growth was in the mid-teens, consistent with the growth rates in the fourth quarter and only a bit below the third quarter. And globally, processed transaction growth was about 25%. This is higher than what we saw in the fourth quarter and was driven by higher growth in Europe due to the continued roll-on of domestic transactions in The Netherlands; and higher growth in the U.S. due to new debit wins such as Sovereign and Huntington; as well as an increase in PIN debit processing resulting from routing decisions.

Just a reminder, insomuch that we continue to get additional PIN debit transactions, processed transaction growth will continue to outpace related revenue growth due to the lower yields that we're getting on PIN transactions.

Looking forward, let's start with our long-term financial objectives. We saw exceptional performance in the first year against our 3-year objectives for the 2011 to 2013 period. We remain confident that our business is capable of a 12% to 14% net revenue compounded annual growth rate and a 20%-plus EPS compounded annual growth rate for the next 2 years as well. These are, of course, on a constant-currency basis and based on the current economic conditions that we see in the world. We also remain committed to our annual margin target of at least 50%.

So based on what I've just told you, let me give you a few other thoughts, specifically about 2012. First, assuming the euro continues to trade at the 1.30 level and the Brazilian real at the 1.75 level for the rest of the year, we would expect about a 2 to 3 percentage point headwind to as-reported net revenue, net income and EPS growth for full year 2012.

Based on our current plan for 2012 strategic investments, we might have an opportunity to deliver some operating margin expansion this year. However, the amount of any improvement will depend on several factors, including global economic conditions and investment opportunities that may surface during the year.

Our plans currently call for G&A growing at a higher rate than A&M. We also expect our depreciation and amortization to grow by roughly another $30 million this year as a result of our strategic investment activity. And for modeling purposes, you should now assume a full-year tax rate slightly below 32%, as a result of our ongoing tax-planning initiatives.

Now let me turn the call back to Barbara to begin the Q&A session.

Barbara Gasper

Thank you, Martina. We're now ready to begin the Q&A answer period. [Operator Instructions]

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Sanjay Sakhrani with KBW.

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division

Ajay, I appreciate the color on the merchant litigation. Just a follow-up on your comments there on interchange rates. Do you mean that you guys would consider some kind of short-term implications to the actual rate? And then just perhaps you could just follow up on the timeline going forward.

Ajay Banga

First of all, the details of this mediation are confidential, so I wouldn't assume that the opposite of what I said may come true. I just don't jump to any of these conclusions. I was just trying to take one topic of speculation off the table, which is what I was reading about in the speculation that is out there. That's all I was trying to provide some sort of insight to. So I'm afraid I can't give you any more than that. I also don't know anything about the timing, because these things are always -- they move around on you. And speculating on timing is not going to get me very far in this topic, so I'm away from that one either.

Operator

And your next question comes from the line of Glenn Fodor with Morgan Stanley.

Glenn Fodor - Morgan Stanley, Research Division

Just thinking about the incentive trajectory into fiscal '12, is there any noise you might want to call out relating to Key or any of these other debit wins that you alluded to? And secondly, there's been talk by your competitor about incentives increasing due to signing more global deals to longer multiyear agreements. Is that a trend that you're seeing? And if so, what's the long-term impact on your business?

Martina Hund-Mejean

Glenn, first of all, as you know, we are not really giving any guidance on the incentives and the rebates line alone. Our guidance includes that line item. So if you're coming down to net revenue -- and as I just said, we feel that this company is really capable of producing, for the remaining 2 years of our 3-year guidance, to 12% to 14% incentive. Anything that might have to move in the market, be it from what U.S. trends on the U.S. debit side or other deals, we have that obviously baked into our thoughts, but I'm not really prepared to break that apart.

Operator

And your next question comes from the line of Tom McCrohan with Janney Capital Markets.

Thomas C. McCrohan - Janney Montgomery Scott LLC, Research Division

So just a question on the merchant -- outstanding merchant liquidation. Is there any outcome from that, that will put at risk the 12% to 14% guidance for revenue -- net revenues for the next 2 years?

Ajay Banga

Well, the way we've tried to give you that guidance includes our thinking of the merchant litigation as we put out into our earnings today. So that's kind of where we are. We've kind of factored our thinking in there. Obviously, if some unforeseen thing emerges from it, I can't speculate on that one. But the way it is built today, clearly, we factored that into our 12% to 14%.

Tien-Tsin T. Huang - JP Morgan Chase & Co, Research Division

Great. And given the 12% cap that you guys disclosed before as far as your obligation of any monetary settlement, should that -- I want to make sure that the math's right. So based on that pretax special item this quarter, that assumes a monetary settlement about $6.5 billion?

Martina Hund-Mejean

So Tom, what we have to do, of course, we have to estimate the amount that we would be taking for a charge. And based on the facts of the table, based on the progress of the mediation, we had to develop a view on what kind of number we had to charge. And this is our best estimate in terms of the charge. And we have to see in terms of the development of the future of the mediation, in terms of where that might be going. But this is our best estimate as of today, and it does reflect the 12% share that MasterCard would have to carry in a potential settlement.

Operator

Your next question comes from the line of Chris Brendler with Stifel.

Christopher Brendler - Stifel, Nicolaus & Co., Inc., Research Division

On the KeyBanc relationship, I just want to make sure I understand that this is a PIN debit only. And can you give us any other thoughts or updates on your progress in securing PIN debit business? I guess my key question there is have you seen a lot of these banks that you're talking to make the decision on how they're going to address exclusivity? Or are they still wrestling with that decision at this point?

Ajay Banga

All right, Chris. First of all, KeyBanc. This incremental agreement with KeyBanc is to add PIN debit and is to move onto our IPS platform, where we also have an ATM relationship with them and a signature debit relationship with them, both of which have got renewed, along with this incremental move that I just talked about. So it's a much wider relationship with KeyBanc. As far as the other aspect is concerned, somewhere in my earlier comments, I talked about the fact that we've actually won these PIN deals with a couple of the very major U.S. banks, and we've actually begun to see some of those transactions. So while the banks are working their way through, let's say, complying with the non-exclusivity criterion, a number of them have began to make their decisions, and those are the ones that we have been able to talk about. So it's WIP, but progress is being made.

Operator

And your next question comes from the line of David Togut with Evercore Partners.

David Togut - Evercore Partners Inc., Research Division

If you exclude portfolio conversions and de-conversions from the fourth quarter of 2011, can you quantify underlying processed transaction growth year-over-year?

Martina Hund-Mejean

Yes. So mostly what we do, of course, on the de-conversions is from a debit perspective, right? And so when we -- there's very, very little movement in there from a de-conversion anymore, because we've pretty much concluded all of those. So it's really the roll-on for the new wins. And when you strip that out, you're coming kind of down to a number of the mid-teens versus the 23% growth that is the top line number.

Operator

And your next question comes from the line of Craig Maurer with CLSA.

Craig J. Maurer - Credit Agricole Securities (USA) Inc., Research Division

Quick question for you on Europe. I was just hoping to get your initial thoughts on the Green Paper that was published in Europe and is now out for comment.

Ajay Banga

Craig, this is Ajay. Let me put it for you this way, right? The Green Paper which came out recently, they've got a 3-month consulting period. It ends in April 11. Basically, they're looking at all aspects of European card, Internet and mobile payments. They're saying -- they're coming from the viewpoint that there's not enough innovation, competition or integration in Europe, which is fascinating, given all the other things they're dealing with. But what this does is it identifies potential obstacles or barriers to further expansion of card, mobile and Internet payments and kind of says we got to do stuff with this. And it may actually lead to a legislative proposal later. But in contrast to what the EC seems to think, we see e-commerce and mobile payments are growing dramatically in Europe. Consumers are adapting new technologies. New players are coming in with different ways to pay. I don't see Europe lagging behind other regions in innovation, when you look at the complete picture. So that's where they're coming from. We share their goal to see commerce grow through more electronic payments on cards and mobile phones and over the Internet. And I think we have the ultimate open platform. We allow new entrants to compete. We result in more choice for consumers, more choice for merchants. We actually see ourselves as a part of the solution, and that's how we're approaching the working with them. We're kind of working with retailers, we're working with telcos, we're working with governments, we're working with software companies and a whole lot of other methodologies to make European payments simpler and easier. I don't think regulation is going to meet that need. It's just going to lead to more fragmentation, less innovation and probably will increase cost at the end of the day. So I'm not big on this stuff. I think we can work with them in a way to enable them to meet their needs of allowing more innovation, allowing an open system, allowing more people to play rather than trying to put up walls to close the system in some way. And that's our attitude towards the Green Paper: positive in terms of participation but not completely agreeing with the basic premises on which the paper was put out.

Operator

And your next question comes from the line of Glenn Greene with Oppenheimer.

Glenn Greene - Oppenheimer & Co. Inc., Research Division

Martina, I know you mentioned this in your prepared comments, but there's clearly -- with the disconnect between the transaction processing fee growth and the transaction processing fee is almost a 10-point delta. And I know you have the PIN transactions sort of driving that, but it seems like an inordinate disconnect, where it implies you had very healthy sort of PIN or Maestro transaction growth. And I'm actually surprised that it's sort of happening so quickly. Maybe a little bit of the color there.

Martina Hund-Mejean

Yes, first of all, we are very happy that, that is happening quickly. So obviously people are making their decisions to get the benefit of these kind of decisions. But let me give you a little bit more detail on the difference between the 23 -- roughly 23% transaction growth and the roughly 12% transaction fee growth. So there's about a 9 percentage point difference, right, between the 2 numbers. And really 1/3 of that, so roughly 3 percentage points are due to the business that we are getting in the United States on the PIN side. And the remaining 6 percentage points are mostly due to what's still happening in The Netherlands, where we're still getting incremental transactions. There's a tiny little bit on Itaú in there, but that's more natural growth. But those are the 3 areas: the United States, The Netherlands and a little bit Itaú in Brazil that are really driving this differential. And as I've just told you about the January numbers, where we're seeing transaction growth of 25%, you should be starting to see an even bigger gap, just because what I told you, PIN transactions are coming in at a lower revenue yield. That is incremental revenue that we are making in our P&L.

Ajay Banga

Glenn, it's Ajay. Let me just add one aspect of that for you. As I said we've managed to get a couple of those major U.S. banks to use us for these PIN debit transactions. And clearly, you're seeing the beginning of the results of that, which is both the fact that we've got the deal with them but also the fact that we've been able to make the operational side of this come together relatively quickly. And that's the point I've been making for a couple of earnings calls, that if we do this well, there is some opportunity here for our company. The second thing is -- to add a little color to what Martina said about Europe, while The Netherlands has a very large impact on what we're doing, finally the SEPA conversions are beginning to show results over the last few quarters. In the fourth quarter of 2011, processing for domestic transactions in SEPA grew 256% over the same quarter last year. For the year 2011, we're up 155%. These are still all small numbers, but the fact is that all that SEPA regulation change is finally beginning to give us some opportunity.

Operator

And your next question comes from the line of Julio Quinteros of Goldman Sachs.

Julio C. Quinteros - Goldman Sachs Group Inc., Research Division

So just real quickly on the merchant side. Haven't really heard you guys talk too much about your efforts in -- on the merchant margin side. So any color there in terms of routing exclusivity, as we think about the merchants and their ability to influence, post Durbin here?

Ajay Banga

Well, the fact is we have -- as I told you earlier, we're looking at all this strategically. We're not trying to put out some master policy statement on how we're going, either at the big banks, or the smaller banks, or the merchants. We're actually talking to all of them. And clearly, from the answer to the previous question, you can see some benefit in our processed transaction growth from what's going on at PIN transaction in the United States, that 3% incremental that Martina referred too. So this is kind of what we're doing. I'm just not going to be out publicly talking much more about it. I'm just going to keep looking at it strategically.

Operator

And your next question comes from the line of David Hochstim with Buckingham Research.

David S. Hochstim - Buckingham Research Group, Inc.

Two things. Can you just clarify what you were saying before about signing PIN business with top 25 banks? So in addition to Key in the fourth quarter, did you sign some others as a second PIN network?

Ajay Banga

Yes. So what I said was that there's a couple of major U.S. banks. We have signed with them to become the alternative PIN brand at the back of their card. And the result of that is showing up in the 3% incremental process transactions that Martina referred to in the total increase. So that's kind of the basic idea that I was trying to say. What I was talking about in the 25 banks was a different context. I was saying that as most people talk about the 25 large banks. But I was also trying to talk about the independent banks and credit unions and the business we are building with them, not just in PIN debit but also in credit and signature debit.

David S. Hochstim - Buckingham Research Group, Inc.

Okay. And then can you just give us any color that you -- changes in the spending behavior in credit in the U.S. and in Europe maybe that occurred in the fourth quarter? And did gasoline have much of an effect in changing spending?

Ajay Banga

Not very on spending. Gasoline, actually, Martina would tell you a little bit about, but not really any change in behavior either on credit in the U.S. or Europe. Or for that matter -- because I'm assuming somebody will ask that, or for that matter between signature and PIN behavior in the United States. So it's early days, so I don't know where that could go. But right now, I'm not seeing anything.

Martina Hund-Mejean

Yes, gas, we really haven't seen any changed behavior. The numbers, in terms of total volume in the U.S. that is spent on gas purchases is still 8%. From a transaction point of view, it's still around about 15%. So that -- sometimes it bounces a little up and down in the quarter, but we really haven't seen anything much different. I just want to add one more thing on the PIN business side, David, because there are also some things that we're seeing as the exclusivity on the back of the card went away. For instance, on the regional networks, we're obviously seeing some of that business too, because people are deciding to move to us rather than through the networks enrolled in [ph] the card originally. So that's a little bit of a benefit for us.

Operator

And your next question comes from the line of Darrin Peller with Barclays.

Darrin D. Peller - Barclays Capital, Research Division

Ajay, first of all, thanks for the comments and the color on the U.S. interchange. I think that goes a long way for a lot of investors. But maybe just talk a little more about the regulatory environment in Europe for a minute, especially on a related-to-it topic. In regard to the cross-border interchange lawsuit. I know we're coming kind of close to a conclusion there. We're expecting a ruling from the EU at some point, maybe in the next 6 months. Any concerns over that? Or maybe even -- any expectations of further intervention by country-specific regulators around this topic, in the topic of interchange in Europe?

Ajay Banga

Look, right now, this matter is sitting in the court, so it's kind of difficult for me to tell you what's new between the time we finished the court hearings and now. So nothing new [ph] has come to us. We're not a party to any discussion of the court since then. We're all sitting there and waiting for them to come to a conclusion based on all the arguments that were presented. We continue to believe we had a good argument, and we presented it with clarity. But we're going to wait and see what happens. There has been very little change at a country-by-country level, to answer the second part of your question. It's really more focused on the commission's ruling, the court's ruling but also the Green Paper, which by the way, came out around the same time and is actually not quite connected. That's a separate conversation, but both things are going on in Europe right now.

Operator

And your next question comes from the line of Bill Carcache with Nomura.

Bill Carcache - Nomura Securities Co. Ltd., Research Division

Hypothetically speaking, what kind of impact do you think that the elimination of a no-surcharging rule could have? And if, hypothetically, something like that were on the table, would there be any reason for concern over an unlevel playing field with Amex?

Ajay Banga

So hypothetically speaking, I have no clue, because I genuinely believe -- I'll tell you my personal belief in this. My personal belief is payment systems work less but best with least friction. Whenever you introduce friction, you always create the opportunity for consumers and merchants to feel less than perfect about their transaction. That's kind of an obvious statement. Having said that, in different countries, where surcharging was allowed, it's not as though every merchant has jumped onto the bandwagon to actually introduce a surcharge. That's partly because of the fact that they do see the value of electronic payment system from their perspective. And it's partly because at the end of the day, I believe that there is a good competitive situation out there for merchants, and they have to watch their own competitive circumstances versus other merchants. And I think that rule will come to play in some stable way, once the clarity around hypothetical surcharging becomes clearer. That's kind of how I think about this. I don't like friction, but it is what it is. And as far as the Amex angle is concerned, again, your question assumes that the surcharging applies to some and not the others. And I don't know if that's a hypothetical move too far. So I don't know yet where that will go, right, so we'll see. But that's kind of where I'm coming out on that.

Operator

Your next question comes from the line of Andrew Jeffrey with SunTrust.

Andrew W. Jeffrey - SunTrust Robinson Humphrey, Inc., Research Division

Martina, you've mentioned -- and I appreciate the difference in revenue yield on PIN debit versus other forms of payment. Yet in the fourth quarter, your net revenue yield was up nicely. Is there something else kind of going on there that we should be thinking about, whether it's mix or pricing or some other dynamic that might be overall offsetting what would be an otherwise lower revenue yield?

Martina Hund-Mejean

Look, first of all, just to take the pricing comment out of the room here. There was only very little pricing in our numbers. It was about 1.5% on total revenues, okay? So that -- yes, it does impact a little bit, but it's not a big deal. The -- what's really also happening is that we obviously earn money both from a transaction point of view, as well as from other businesses that are driving our revenues. And they're not related to GDV. So for instance, what you see -- what our DataCash revenues are adding, what our Access Prepaid revenues are adding, what our consulting business is actually adding, that's not related to the volume driver. So you will see -- as we are growing those kind of businesses, you would see some of these yields increasing. And that would be then when you just look at our main processing business. We said over time, you should be seeing a slight decline in the yield, as we're getting more and more transactions and volume growth, and as we are incenting customers to run more volume over our network. We have to look at those 2 sides. And when you put them together, you really have to pull them apart.

Ajay Banga

That's why I say once in awhile revenue yield is not the single metric you should use. Because in addition to what Martina just described, you've got the mix of cross-border volume, you've got geographic mix, you've got product mix. Yield is a composite of many things. And only one element of it is the PIN debit contribution to our total revenue, which clearly has a lower yield as we've said -- but not a lower profitability, just a lower revenue yield.

Operator

And your next question comes from the line of Jason Kupferberg with Jefferies.

Jason Kupferberg - Jefferies & Company, Inc., Research Division

Nice to see what I think most people would consider to be effectively a guidance raise here, as you're taking the top and bottom line CAGRs out for the next 2 years. Can you just talk about the general factors that gave you guys the confidence to do that at this point in time? You obviously had an extraordinary 2011, which does create a tough comparison. And as you guys discussed, there's still some macro uncertainty to cope with, so I think it's all the more encouraging to see what you guys had to say for the 2012, 2013 period. Maybe if you can just give us some of the underlying factors that are driving the outlook, that would be great.

Martina Hund-Mejean

So look, Jason, we are always going back to what we call the 3 concentric circles that we showed you at the Investor Day, right? First of all, PCE. And where PCE in the world is a really important driver for all our baseline growth. And there we made the comment that the United States is feeling a little bit better. We're not really seeing much pain coming through at the moment in Europe, but we're going to have to watch very closely, because of the consumer confidence falling. Asia-Pacific, Latin America, Middle East, Africa is still behaving very nicely. So we're feeling relatively comfortable in terms of where we put our mark from a PCE point of view for those 2 years, as well as from a longer-term point of view. Number two, as you know, we are really going after converting cash to electronic forms of payment. 85% of the world's transactions are still done in cash. There is a lot of room to be working. I mean, you look at what our products people do and our services people, how they help, we are all focused on making sure that, that 85% goes down to 80% to 75%. Last but not least, we obviously want more than our fair share of that, right? So our last focus is how do we behave in the marketplace, how do we get profitable market share and how do we put products out there, so that we are actually successful doing that. So don't forget about those 3 things. And even if one of those things -- so the PCE number goes up and down depending on where the world is going, we still have the 2 other things to drive. That's what you see us do in 2011, and we feel, based on where we are today -- I always have to reiterate, this is a "today" comment, okay? We feel that the next 2 years are looking good from that range point of view.

Ajay Banga

Let me add a little bit to that, Jason. I think of those 3 circles just like I was talking about the revenue yield earlier. I think of these as composites that come together. They are almost like multiple legs of our stool that we control as we play our game of management. And so yes, I don't control PCE growth. But given where we are today, in Martina's comments, the U.S., Latin America and Asia and Middle East look okay. Europe looks okay today. But history of them, that when consumer sentiment begins to go down, 3 or 4 quarters down the road, it begins to show up. So I'm a little less -- more cautious about that than I am about the other regions. But then I'm very focused on all the things I've been telling you for the 1 or 2 years on changing the cash versus e-commerce ratio. What's the electronic commerce ratio? Hence the things with the Social Security in the U.S., or with the Punjab government in India, or within Russia, or things they're doing in Italy with the post office. All those add up to trying to take away the traditional sanctuaries of cash and look at getting them to come to us. Now in any one transaction, they don't change the needle. But when you do it consistently over a period of 2 or 3 years, it does change what numbers we operate off. And then, of course, there's the market share gain, which -- we are competitive guys. We like to win some good market share. And that's the third angle. So all 3 give us a balance in the different legs to our stool.

Operator

And your next question comes from the line of Bob Napoli with William Blair.

Robert P. Napoli - William Blair & Company L.L.C., Research Division

Facebook released their S-1 yesterday. I'm sure you knew that. But in their S-1, they showed $500 million of payment revenue. And I wondered if -- most of that tied to virtual games. And I just wondered if that surprised you and just kind of what -- how you work with Facebook and how the economics are. And if -- their focus on the payments market is -- and do you view that more as an opportunity for MasterCard or a concern?

Ajay Banga

Well, they've got their revenue actually -- I've read the S-1 in great detail and was interested in the Facebook IPO from a personal perspective as well. I think it's an interesting development. The -- I'm not surprised at all by their payments revenue, because how do you load the Facebook credit right now? You do it through various ways, which includes our card. So I cannot see that data, and I understand it. I actually think that for us, working with them is a huge opportunity, just as it is for other people as well. We're not the only -- we're not the only girls at the dance, there's others too. And so we're all chatting with them, and we're all trying to do business with them. And we do some things with them already. And we're going to be doing more with them I'm sure as the years go by. So it's the same approach I have with a lot of other opportunities. I think new technology is an absolute opportunity for MasterCard if we engage with it and we work with it well. We share the same questions on telecom companies 2 years ago, and we've shown you over 2 years. We engaged with them. We worked with them. And in fact, they realize our value, we realize their value, and there's a business to be made in working the 85% of transactions that still are out there that's coming to electronic commerce. And so there's a much bigger space out there than getting worried by the risks. I think it's an opportunity every day of the week.

Operator

And your next question comes from the line of Rod Bourgeois with Bernstein.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

Just wanted to talk about the long-term plan on the operating margin front. It seems like you're saying today that there's possible room for some margin expansion in 2012. But I also wanted -- after 2012, I mean, are you saying that we shouldn't be expecting margin expansion after 2012? So if you could just clarify, what's the swing factor that matters the most for margins in 2012? And then what's your current plan for post 2012 on the margin front?

Ajay Banga

Rod, I'll try explaining this again. My approach to operating margin came out of the context when we were originally saying we would expand our margin by 800 basis points every year. All I was trying to do was to say, given this 85% of cash out there, given the unbelievable opportunity in this industry, I would rather keep the margin at a very healthy minimum of 50% and take the money that generates for the company with our revenue growth and with that leverage in our P&L and put it towards making tomorrow even better for our company, as compared to merely taking the 50% to 52% to 54% to 56% to 58%. That's the context in which I gave it. I've also said that if revenues are doing better, I'll let that flow straight through to margin, which I've done over the course of 2011. And that's kind of how I think about it. So in 2012, right now, we feel pretty good about the fact that we can get deliver more than the 50%. We're even telling you we may actually be able to deliver more than what we ended 2011 with as a year. But if investment opportunities come up that today we have not foreseen, and if the economy looks to be in decent shape, and I feel that's a good risk-to-reward tradeoff, I'm going to use some of that money to still meet my commitment to you, while putting it into the long term. That's the angle with which I look at operating margin. I look at revenue growth and net income and EPS growth as the 2 things that are the gating factors. I look at the operating margin as if I can keep at least 50, which I think is an extremely healthy place to be, then put whatever I can get back into growth. If I can't think of good ideas, it goes right back to you as the shareholder. That's the perspective on operating margin.

Martina Hund-Mejean

So Rod, for each one of the years that we have in the 3-year guidance, we said a 50%-plus operating margin. And look, in 2011, yes, we had a little bit of a margin improvement, but we did precisely what Ajay said. We didn't run after that particular margin improvement. We had a certain set of facts on the top line. We made the investments that we believe we need to make in order to actually make a better future for the company in the -- for the company to come. And that's the investments that we did. So the operating margin is really a result of those kind of managerial decisions. And every year will be a little different on that, but we are focused on making sure that we at least keep this very healthy 50%.

Ajay Banga

Plus.

Martina Hund-Mejean

Plus.

Ajay Banga

Correct.

Rod Bourgeois - Sanford C. Bernstein & Co., LLC., Research Division

Okay, great. And then just one final question. And this is probably a quick one. Visa has a common switch strategy and a network participation fee. We know that there's not much detail on how those things will be implemented. But can you assert today a plan on what MasterCard will do on the common switch front or on the network participation fee front or is it premature for you to assert [ph] ?

Ajay Banga

I told you when you were here. Yes, yes, look, I told you when you were here, we actually can -- thanks to what we do with Maestro, by the way. That's exactly how it works. So it's not that we can't do that. I'll say that to you again and again, we can do it. It's not a revelation to us. So just so you get that context, we have the ability, the capability and the operational competence in our technology. And we've been doing it for years in Europe and elsewhere, where Maestro is used. As far as the network participation fee, or a merchant strategy or a detailed strategy around Durbin is concerned, I don't feel that I need to go out with a blanket statement of a strategy, because I'm not the one protecting the incumbency. Somebody else is. And so in their shoes, I may well have done what they're doing. But I'm not in their shoes, fortunately, this time. And so I'm doing it my way. And my way is showing up in the processed transaction growth that you're seeing. And so that's what I'm going to say. I'm not going to be able to give you much more, unfortunately.

Operator

And your next question comes from the line of Bryan Keane with Deutsche Bank.

Bryan Keane - Deutsche Bank AG, Research Division

Just looking at the First Data spin track, PIN debit has been taking some share for signature. But I think you said, Ajay, that you hadn't really seen that. I guess maybe do you expect PIN to be taking some share versus signature? And I saw the EMV announcement you guys made this week. It sounds like you guys are open to chip and PINs. So I would assume that PIN would be -- could be increasing in the future.

Ajay Banga

So you're actually onto a very interesting topic, which I -- which is fascinating. Truly, I haven't seen that change. Part of that is because, remember, we were starting from a smaller place, so for me I'm getting some incremental volume in the door. And I haven't really seen a big move today between PIN and signature. Now let's step back from today, because today is still only a few months after the Durbin and non-exclusivity rules went into play. There's so many things going on right now in that space. Think about -- there's no real incentive for a merchant to move from one to the other, because the merchant discount rate has just got equalized. I mean, interchange for the issuer got equalized. So nobody's got an incentive to push one way or the other, given the way it is today. But if you look out further, if you think about creating a payment ecosystem for mobile payments, for electronic payments, out a few years, we really believe that EMV is the right way to go. Now what we're trying to do is rather than mandate it is to consult with merchants, issuers and other partners, which we have done systematically over the last few months, and then finally said let's create the right incentives for people to go to the best way in the long-term, which would be the most secure way, which would be that way of going to EMV and PIN. And that's the chip and PIN angle that we're trying to put out there. I see this as a journey. I don't see it as a -- as it'll happen tomorrow or day after. I think it's a journey. And what we're trying to lay out in that EMV announcement is where we think the journey would lead to. I can't tell you today how long it will take to get there, because I suspect some issuers and some merchants will roll on quicker, others will roll on slower. They all have their own compunctions, and I kind of understand that. So that's where I'm coming from.

Operator

And your final question comes from the line of Greg Smith with Sterne Agee.

Greg Smith - Sterne Agee & Leach Inc., Research Division

Martina, I'm still confused about the transaction processing fees, the fact that they declined sequentially in the fourth quarter. I understand the pricing impact and everything, but was there -- or the PIN debit impact. Was there any sort of issuers hitting new pricing tiers or anything else going on that could have impacted that revenue line item?

Martina Hund-Mejean

No. We have seasonality, that's typical. You have to really -- you shouldn't look at this sequentially. You really have to look at that versus the year-ago quarter, and that's where I made my remarks that you really have to compare the 23% transaction processing growth versus the 12% transaction fee growth.

Greg Smith - Sterne Agee & Leach Inc., Research Division

Okay, that's helpful. And let me just sneak in one last one. Just as we think about moving to chip cards in the U.S. and mobile, globally, how should we think about that impacting MasterCard's economics broadly over the next few years?

Ajay Banga

Favorably, I'm hoping. That's where I'm coming from. So I hope to participate in it. I hope to get more volume out of the conversion of cash. I hope to get most secure transactions for my partners in the merchant world and the issuer world. That's kind of where I'm going with it, yes.

Martina Hund-Mejean

It's all part of driving our top line the way that we talked about it.

Operator

I'd now like to hand the call back over to our CEO, Ajay, for closing remarks.

Ajay Banga

Thank you. So let me leave you with just a few quick closing thoughts. And thank you all for those questions, folks.

We had a terrific 2011. Our financial performance was driven by strength, not just in our base business, as well as tremendous execution by our employees across our regions, which led to some significant business wins. And that's the 3 concentric circle discussion that Martina got into. At the same time, we have made targeted investments and partnerships in our strategic focus areas. And I hope by doing that, what we're doing is to lay the foundation for longer-term growth.

For the year ahead, we're very mindful of concerns around how the European economy will fare and any knock-on effects around the world. The main effect on this -- the main impact of this would obviously be on that global consumer spending growth. But PCE is only one of our growth drivers, the other 2 being the proportion of electronic-to-cash payments and our share of that electronic portion. Those 2 areas are where we are focused.

We will continue to execute at a local level to displace cash by driving issuance, acceptance in new categories and by delivering the benefits of electronic payments to more people, more institutions and more merchants. We're trying to ensure that we capture more than our fair share of payments growth.

So once again, thank you for your participation. Thank you for your support for our company, and thank you for your time today.

Operator

Ladies and gentlemen, that concludes your conference. You may now disconnect. Have a wonderful day.

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